Posts Tagged ‘TARP’

AIG Repays Another $2 Billion in TARP Money

Thursday, September 8th, 2011

The Treasury Department is laughing all the way to the bank. Insurance Giant AIG repaid $2.15 billion that it had borrowed through the Troubled Asset Relief Program (TARP).  In 2008, the government helped the giant get back on its feet with a $180 billion loan.  AIG has been gradually repaying the money.  The most recent repayment is the result of the sale of AIG’s Taiwan-based subsidiary Nan Shan Life Insurance Company. One of AIG’s strategies for cutting its debt has been to raise funds by selling assets.  “We continue to make progress in helping the Treasury and taxpayers recoup their investment in AIG,” according to AIG CEO Robert Benmosche.

Not surprisingly, the Treasury Department is pleased with the transaction.  “This is another important milestone in AIG’s remarkable turnaround,” Tim Massad, the assistant secretary for financial stability, said in a statement. “We continue to make progress in recovering the taxpayers’ investments in AIG.”  AIG still owes Treasury $51 billion.  TARP legislation was passed by Congress in late 2008 to rescue the financial sector, which was on the verge of collapse.

Benmosche is still weighing whether to retain a stake in AIA Group Ltd. while repaying TARP funds. AIG sold 67 percent of Hong Kong-based AIA last year in an IPO that raised $20.5 billion. The remaining interest added $1.52 billion to AIG’s second-quarter profit as the Asian insurer’s stock price surged. AIA has soared 19 percent this year and is the number one gainer in the 73-company Bloomberg World Insurance Index. “It’s been a great investment, so they may want to hold onto it,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP.

Now that the Nan Shan deal has closed, AIG’s final significant disposal will be International Lease Finance Corporation, or ILFC, which purchases airplanes to lease them to airlines.  The company is considering an initial public offering (IPO) for ILFC later this year.  Using Nan Shan proceeds to repay the special purpose vehicle gives AIG “more flexibility as to what to do with ILFC and other assets, too.  It adds in general to their cash-flow flexibility.”  He is telling his clients to buy AIG stock.  Treasury holds a $9.3 billion preferred interest in the special-purpose vehicle after accepting proceeds from the Nan Shan sale, according to AIG.  Benmosche may delay or forego selling AIA shares.  AIG’s agreement with underwriters lets Benmosche reduce or hedged the stake in October.  “We’re looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all,” he said.

Writing in The Hill, Peter Schroeder says that “In many ways, AIG came to serve as a symbol of much of the public’s anger over the bailout, as it found itself at the center of the historic financial crisis and reliant on substantial government support.  That dissatisfaction came to a head in 2009, when executives at the company planned to distribute hundreds of millions of dollars in bonuses after billions in losses during the financial crisis.  In January, AIG completely repaid the Federal Reserve Bank of New York with a $47 billion payment, and the Treasury in May agreed to sell 200 million shares of AIG stock, raising nearly $9 billion in that offering.  The latest payback from AIG means the Treasury has recovered $313 billion of the investments it made under the Troubled Asset Relief Program (TARP) — roughly three-quarters of the $412 billion it originally dished out to keep the financial system afloat.  The Treasury announced in March that it had officially turned a profit on the bank portion of TARP.  It followed that up with a July announcement that it had exited its investment in Chrysler, ahead of schedule but losing about $1.3 billion in the process.”

On the Huffington Post, Jason Linkins has a cynical take on AIG’s recent repayment of TARP money. “Okay, I’m just going to stop it right there, because when it comes to ‘AIG’s remarkable turnaround,’ the devil is in the details.  Time and time again we’re asked to celebrate the success of TARP.  Back in March, the good news was that, ‘The Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.’  But this profit that the government has turned on the bailout of AIG rings pretty hollow in light of the four different restructurings of the original agreement that the government has acquiesced to since the fall of 2008.

“When the Fed first stepped in to prevent AIG from collapse in September 2008, the deal was actually pretty good — it carried a punitively-high interest rate appropriate for a bailout, the CEO was dismissed and the company was going to sell itself off in parts, ending its too-big-to-fail status.  If the government were turning a profit on a deal like this, it would indeed be good news.  The trouble is, AIG’s new management didn’t break up the company very quickly.  And even as it paid out lavish bonuses to its top-performing traders and executives, it couldn’t make good on its interest payments to the government.  So the feds stepped in again — and again, and again — throwing more money at the company, reducing the interest that it would pay taxpayers and eventually converting the government’s loans to common stock, abandoning concrete repayment obligations in favor of whatever the stock might someday be worth.”

House Republicans Want to Water Down Dodd-Frank Financial Reforms

Monday, March 7th, 2011

Republican congressmen searching for sizeable spending cuts are targeting Wall Street’s regulators over a plan to slash millions from the budgets of several vital agencies. They are setting their sights on the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  The workload of both agencies is expected to increase significantly as the Dodd-Frank financial reform law is implemented. House Republicans want to slash the CFTC’s funding by $56.8 million – nearly 33 percent of the agency’s entire budget — over the next seven months.  The SEC’s funding would be cut by $25 million over the same time.

CFTC Chairman Gary Gensler said he would have no option but to reduce his staff from 680 to fewer than 440 if the cuts are approved.  “We’d have to have significant curtailment of our staff and resources,” Gensler said.  “We would not be able to police…or ensure transparent markets in futures or swaps.”  Under Dodd-Frank, the CFTC regulates the multi-trillion dollar derivatives market that includes over-the-counter products called credit default swaps.  The story is similar at the SEC, which is working to augment its enforcement of Dodd-Frank.  “It (budget cuts) will have a very real effect on the SEC’s ability, not just with respect to Dodd-Frank implementation, but also with respect to our core mission,” SEC Chairman Mary Schapiro said in testimony before Congress.

Leading the charge in Congress is Representative Randy Neugebauer, chairman of the House Financial Services Subcommittee on Oversight and Investigations. One of Neugebauer’s top priorities is assuring that regulators are not “overreaching” and moving too quickly with their new authorities under Dodd-Frank.  Neugebauer expressed concern about whether regulators are adequately performing cost-benefit analyses on every rule in Dodd-Frank, a process required under federal rule-making procedures.  He expects to call SEC Chairman Schapiro and CFTC Chairman Gensler back to testify about the issue, especially since he believes that Gensler gave him “vague” responses about cost-benefit analyses on derivatives rules.  Neugebauer said another of his major priorities will be to rein in the powers of the Consumer Financial Protection Bureau, an entity created under Dodd-Frank.  The Texas congressman wants to move the bureau to the Treasury Department and out of the Federal Reserve’s control.

Another congressional Republican makes this point.  “When the House and Senate passed the Dodd-Frank Act, supporters continually purported that small financial institutions, like many I represent, were exempt,” Representative Shelley Moore Capito, (R-WV) said.  “As the provisions of Dodd-Frank are going through the rule making process, I am starting to hear concerns from small institutions about the unintended consequences that could adversely affect them.”

One point of contention with the Republicans is the orderly liquidation provision that authorizes regulators to seize large financial institutions that are about to fail and dismantle them in a way that is less disruptive than either taxpayer bailouts or bankruptcy.

“People are saying we won’t have the guts” to invoke orderly liquidation, acknowledged Democratic Representative Barney Frank, (D-MA), who co-sponsored the legislation with now-retired Senator Christopher Dodd (D-CT).  “Well, we had the guts with regard to the TARP to get the money back.  We got it back,” he said, referencing the $700-billion Troubled Asset Relief Program (TARP) that bailed out Wall Street firms and which has been largely repaid.  “I don’t have any question that we’re going to go through with it,” Frank said.

Fannie, Freddie Bailouts Could Cost the Taxpayers $154 Billion

Monday, November 8th, 2010

Taxpayer bill for Fannie, Freddie bailout could reach $154 billion. The ultimate cost of bailing out Fannie Mae and Freddie Mac could cost as much as $154 billion unless the economy improves, according to a government report.  The mortgage giants rescue – which has kept the housing market on life supports – already has cost $135 billion to cover losses on home loans in default.  The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, says the most likely scenario is that house prices will have to fall slightly during a slow economic recovery, then rise a bit.  If that occurs, the Fannie and Freddie bailout will cost taxpayers an additional $19 billion.  A more upbeat prediction sees the housing market recovering sooner, which would require just $6 billion more for a total bill of $141 billion.

Washington, D.C., research firm Federal Financial Analytics believes the FHFA projection provides a sound indication of what the bailout will cost, but “nowhere near a definitive picture of it.”  Fannie and Freddie issued a joint statement that said “It’s simply impossible to forecast reliably now how much foreclosuregate will cost.”  Fannie and Freddie’s plight stands in sharp contrast to the success of the Trouble Asset Relief Program (TARP), which is now expected to cost just 10 percent of the $700 billion originally forecast.

Federal regulators seized Fannie and Freddie in September of 2008 in the wake of the financial crisis.  Since then, the government has kept the agencies solvent, with President Obama pledging unlimited support.  “From the beginning, the Obama administration has made it clear that the current structure of the government’s role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long term,” said Jeffrey Goldstein, Treasury Department undersecretary for domestic finance.

Elizabeth Warren Ideal Head for the Bureau of Consumer Financial Protection

Thursday, August 19th, 2010

Elizabeth Warren to be our new consumer protection czar.  A leading candidate to head the new Bureau of Consumer Financial Protection is Elizabeth Warren, although her potential nomination is not without controversy.  Writing on CNN Money.com, Katie Benner says “Detractors say that Warren lacks experience, that she’s not impartial, and that she could make it so expensive to extend credit that only the richest Americans and biggest businesses could get a mortgage, a credit card or a loan.  But these knocks against Warren obscure the likely impact that she would have on the bureau.  And mostly, they are straw men.”

Warren is a Beltway outsider and a Harvard law professor.  She did take leave in 2008 to head the Congressional Oversight Panel (COP), which evaluates TARP and oversees the Treasury Department.  Since its inception, the COP has published 22 detailed reports with little dissent, despite multiple differences of opinion regarding economics and politics among the staff members.  Ken Trotske, an economist who serves on the panel, describes Warren as a consensus builder.  “I’m in awe of the work they turn in to meet that schedule, because it’s a demanding schedule.”

In its two years of existence, COP has become an intellectual hub in Washington, D.C.’s efforts to understand the relationship between the federal government and Wall Street.  According to Benner, “The outcry over Warren’s impartiality is a through-the-looking-glass twist on the current state of our regulatory affairs.  It bears repeating that it’s a good thing for the head of an agency designed to protect consumers to actually put the interests of consumers first.  For the last few years, as was made imminently clear by the implosion of 2008, Wall Street regulators were doing anything but regulating.”

In Benner’s words, “Someone like Warren is a shock to that system.  She unabashedly sides with consumers.  She hates fine print and contracts with ‘gotcha’ clauses.  She wants to eliminate predatory loans.  And she thinks that it’s okay for bank profits to be crimped in service of a level playing field between borrowers and their lenders.

Treasury: TARP Repayments Now Surpass Debt

Tuesday, June 29th, 2010

TARP repayments total $194 billion; $190 billion is still outstanding.  The $700 billion Troubled Asset Relief Program (TARP) is turning out to be a better bet than many thought at first. According to the Treasury Department, the amount of money repaid by banks and other recipients now exceeds TARP’s outstanding balance.  In a monthly report to Congress on the program, TARP repayments total $194 billion; $190 billion is still outstanding.  A large chunk of that came when Treasury sold 1.5 billion Citigroup shares it had acquired when bailing out the bank, netting $6.18 billion.

“TARP repayments have continued to exceed expectations, substantially reducing the projected cost of this program to taxpayers,” said Herbert M. Allison, the Department of the Treasury’s assistant secretary for financial stability.  “This milestone is further evidence that TARP is achieving its intended objectives:  stabilizing our financial system and laying the groundwork for economic recovery.”

Created during the darkest months of the financial meltdown in the fall of 2008, TARP originally was intended to purchase toxic subprime mortgage securities from banks.  Henry M. Paulson, who was Treasury Secretary at the time, later altered TARP to channel money into banks to stabilize them and provide capital to encourage them to make loans at a time when the capital markets were frozen.  TARP funds bailed out 707 American banks – including Citicorp and Bank of America — to the tune of $205 billion.  Another $331 billion was used to bail out companies such as General Motors and Chrysler.

Banks are making a concerted effort to repay the money to avoid strict executive compensation limits.  By May 31, 71 banks had repaid 100 percent – or $137 billion — of their TARP money.  President Barack Obama hopes to recoup some TARP losses with his proposal to tax the 50 largest financial institutions.  This would net approximately $9 billion annually over 10 years.  Congress is considering the legislation, which faces stiff opposition from the big banks.

Trouble Ahead for Community Banks

Monday, May 10th, 2010

Banks with less than $10 billions in assets are facing commercial real estate losses.The nation’s small and medium-sized banks – those with under $10 billion in assets – could see a spate of commercial loan failures in coming years, according to a report issued by the Congressional Oversight Panel as part of its supervision of the Troubled Asset Relief Program (TARP).  The panel’s chair, Harvard law professor Elizabeth Warren, is “deeply concerned” that commercial loan losses could destabilize many smaller banks – which account for nearly 50 percent of all small business loans.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, is especially troubled about the interaction among bank lending, small business employment and commercial real estate values.  According to Lockhart, a significant amount of CRE exposure is concentrated at smaller institutions, which carry almost half of total CRE loans.  Small firms’ reliance on banks with heavy commercial real estate exposure is considerable.

The Wall Street Journal counters the pessimism by pointing out that a decrease in unemployment and easier credit for developers could mitigate the losses, thus easing the pressure on real estate developers and other businesses trying to make their payments.  On the other hand, Dr. Gary Shilling, president of A. Gary Shilling & Company, an investment advisory services company, is urging his clients to avoid regional and community banks.  He expects that many more banks will fail, but notes that the Obama administration “is extending the Troubled Asset Relief Program to them and is using other techniques to keep them, as a group, intact.”

Obama Administration Rolls Out New Program to Help Underwater Homeowners

Monday, April 5th, 2010

A new FHA initiative could help between three and four million distressed homeowners.  The Obama administration has announced a new initiative to assist troubled homeowners by helping them refinance with government-backed mortgages that cut monthly payments.  The program would also temporarily reduce payments for unemployed borrowers who are actively job hunting.  The government is encouraging lenders to write down the value of loans for borrowers participating in modification programs.  Officials expect this and other in-place federal programs to help between three and four million distressed homeowners over the next several years.  A Treasury Department statement said the initiatives are designed to “balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot and should not help everyone.”

The thrust of the new initiative, which likely will cause some controversy, is that the government – through the Federal Housing Administration (FHA) – will help owners who are underwater or owe more than their house is worth to refinance.  Estimates are that 11 million households or 20 percent of all mortgage-holders, are underwater.  Many of these homeowners refinanced during the housing boom and took cash, putting them at risk when prices fell.  The homeowners will have to eat some of their losses, but will be in better shape than families who had no option but foreclosure.  By insuring the new loan against the risk of default, the FHA gives the borrower a good reason to make payments instead of abandoning the house.

The program’s success depends on investors’ eagerness to participate.  Over the last three years, the FHA has expanded its mortgage guarantee program to help homeowners cope with the housing crisis.  Today, the FHA guarantees more than six million borrowers, many of whom made small downpayments and currently are underwater.  Approximately $14 billion in TARP funds will fund the project.

Kenneth Feinberg Widens Review of Rescued Bank Compensation

Thursday, April 1st, 2010

The nation’s pay czar is widening his review of how much money hundreds of banks paid their top executives during Pay czar is asking for details on compensation at U.S. banks that took TARP money.  the 2008 financial crisis. Kenneth R. Feinberg, officially the Special Master for Executive Compensation, is asking for details on compensation at 419 banks that were bailed out by the Treasury Department’s Troubled Asset Relief Program (TARP).  Because Feinberg’s authority over compensation only started on February 17, 2009 – when President Barack Obama signed the $787 billion stimulus bill into law and gave Treasury the ability to shape compensation at bailed-out companies – he can do nothing about bonuses paid at the end of 2008.

The standards for deciding that compensation is excessive must be “contrary to the public interest.”  Feinberg’s “look back letter” gives the firms 30 days to provide the information requested.  The compensation review applies only to managers who earned upwards of $500,000 during the four-month period that is under assessment.  Scott Talbott, senior vice president of the Financial Services Roundtable, said the big banks “will work with Mr. Feinberg to demonstrate that the industry has eliminated pay practices that encouraged excessive risk-taking.”

Last fall, Feinberg cut executive paychecks by approximately 50 percent for the seven biggest bailout recipients.  Of those, Citigroup and Bank of America have since repaid the government.  Feinberg was able to pressure AIG employees to return a percentage of their compensation.  James Angel, a finance professor at Georgetown University’s McDonough School of Business, said, “On one hand, some of these banks were effectively forced to take TARP money.  But you could also argue that the executives of surviving banks should not be compensated highly because it wasn’t really their particular skill, it was their luck that they were in an institution that survived when the government bailed out the financial system.”

TARP’s Price Tag: $109 Billion

Monday, March 29th, 2010

CBO predicts that TARP’s ultimate price tag will not be as high as expected.  The Congressional Budget Office has determined that the Troubled Asset Relief Program (TARP) will cost the government $109 billion – just 16 percent of the $700 billion set aside to rescue the nation from the great recession.  Insurance giant AIG and the auto industry are TARP’s largest beneficiaries.

The federal government bought $40 billion in AIG preferred stock and created a $30 billion line of credit for the firm.  Earlier CBO estimates that AIG would cost the government $9 billion; since AIG hasn’t paid the Treasury Department the quarterly dividend it owes, the CBO increased its projected loss to $36 billion or more than half of the bailout cost.  The CBO estimates that TARP will lose $34 billion from its bailout of Chrysler and General Motors.

TARP’s mortgage modification program is estimated to use less than $20 billion, less than half of the $50 billion set aside to help people stay in their homes.  The CBO says that fewer people will participate in the program than anticipated.  When President Barack Obama announced the program in February of 2009, he said that as many as four million homeowners could reduce their monthly payments to no more than 31 percent of their pre-tax incomes.  At the end of February, only 170,000 distressed homeowners had taken advantage of the mortgage modification program.

TARP Banks Lending on the Rise

Tuesday, March 2nd, 2010

Lending by banks that received TARP assistance rose 13 percent in December.  Eleven American banks that received money from the Troubled Asset Relief Program (TARP) originated 13 percent more loans in December than they had the previous month. The Department of the Treasury released this information in its monthly survey of loans made by recipients of the $700 billion government bailout money.

According to the Treasury Department, total loan balances fell one percent during the same timeframe.  This report does not include statistics from banks that repaid their TARP funds in June of 2009; future reports will not include data from banks that are exiting the TARP program.

A total of $178.1 billion in new loans was made during December, according to the Treasury.  Bank of America led the pack in originating loans, with $64.6 billion, an 11 percent increase over November.  Wells Fargo & Company occupied second place with a six percent increase, reporting $58.3 billion in new loans.  Citigroup lent $16.3 billion, an 11 percent increase.